Heightening Innovation Capability Through Company ReBuilding
Innovate or die – the new normal
There can be no dispute. We are living in a time when the innovation capability of companies has become a decisive factor for their very survival. Numerous examples of companies such as Motorola, Polaroid, or Sears are clear proof of this. Initially, their future seemed assured, then they lost their leading positions because they were no longer able to keep up with the speed of innovation in their industries. Let’s look at Motorola. At one time the worldwide market leader for mobile telephony during the 1990s, it gradually became irrelevant – initially during the change from analog to digital technology, later with the appearance of smartphones.
In itself, the need for innovation is nothing new; after the development of new technologies, companies have always striven to secure a competitive edge for themselves. This need has grown immensely, however, as a consequence of the rapid development of social trends and economic factors as well as the introduction of new technologies with the result that the average lifetime of companies is on the decline. A study from 2016 documents that the chances of survival for American companies with an IPO before 1970 were 93% while the chances for those with an IPO after 2000 were no more than 63%.
The helplessness against the “digital disruptors”
Driven by an increase in venture capital following the bursting of the dotcom bubble, young technology companies have sprung up in many industries during the last decade and quickly generated corporate value of one billion dollars – the so-called unicorns such as Uber, Airbnb, or Lu.com. Using digital technologies, these startups are in a position to define new business fields while conventional companies overlooked the existing market potential or were incapable of exploiting it.
Newcomers such as Netflix, Spotify, WhatsApp, or Alibaba demonstrate how newcomers can use the digitalization of elements in the added-value chain to redefine the rules of the game on existing markets. At times, there appears to be a realistic chance that they will in the middle or long term force the incumbents out of the market if the latter continue to sit idly by and just watch.
Simply working like a startup: wrong!
Established companies often attempt to take an approach similar to that of startups by establishing business units such as accelerators and innovation laboratories for the development of new products and services. Laboring under the impression that distance from day-to-day operations opens up space for the germination of new ideas, these units are deliberately kept far away from standard operations. But these attempts rarely meet with success.
While there are many reasons for these failures, the starting positions of incumbents and startups, which could hardly be any more different, are very frequently ignored completely. Whereas a startup looks at a new market from the perspective of an “empty canvas,” established companies serve a broad and diverse range of markets and carry baggage from their previous history in the form of processes, infrastructures, and resources. The attempt simply to suppress this heritage disconnects fully from the reality in incumbents.
Now what? Be innovative: fine, but how?
This is the point where Company ReBuilding offers a way out by bringing together the flexibility of agile units with the advantages of an established company.
Let us digress for a moment to explain what the Company ReBuilding approach is. The objective is to utilize the strengths of the established company to develop an ecosystem comprising small units (cells) that are bound together by a common vision. Along with the vision, a common blueprint of values and rules is decisive for the cohesion of the ecosystem. Its development is driven by the resources that are already available in the company. It is imperative for this development that each of the cells not grow beyond a certain size, the so-called Dunbar’s Number; when this point is reached, it divides and/or forms a new cell. Each of the cells acts autonomously, i.e., the critical decisions are made within the cell itself. Thanks to manageable size, shortened communication paths, and high degrees of freedom, unnecessary overhead is avoided and maximum customer orientation is secured long-term.
An analysis of the reasons for the failure of startups reveals the following three principal causes: (1.) no demand on the market for the developed product; (2.) inadequate funding to maintain the ongoing operation of the business; and (3.) an ill-suited team. It will come as little surprise to note that, in contrast, these weaknesses exist as strengths in established companies. Incumbents already have a broad clientele and are in the advantageous position of knowing the needs of their customers first-hand. As soon as a market need is recognized, they are better positioned to finance the required innovations, whether alone or with partners. Moreover, established companies have at their disposal a greater selection of employees who can contribute a broad diversity of skills and have the right mindset. In addition, established companies enjoy brand awareness and market shares on their relevant markets.
The five basic principles of innovations during Company ReBuilding
During Company ReBuilding, the individual cells assure the highest possible level of customer centricity and enable flexible responses to changes. This customer centricity and flexibility enable the cells to drive the development of new products and services. The small, lean internal structures are predestined to unleash the innovative strength of the parent company. If the innovations coming out of the small units are to be able to generate a consistent picture, control mechanisms are indispensable. Turning ephemeral ideas into sustainable growth cannot be achieved unless the appropriate framework conditions have been created.
When we observe the markets for successful innovation approaches, we discern the following fundamental principles regarding control mechanisms and innovation: vision, balance, processes, monitoring, and validation. A brief description of the underlying basic ideas is given below. It is nevertheless important that their concrete form be adapted to the existing framework conditions during the operational implementation in every organization:
- Formulating the vision means that the company should set forth a clear image, even before the first cell is created, of where it would like to go with its future innovations and what targets should be achieved to make this happen. This is not a matter of concrete instructions issued by top management, but instead a general directive staking out the broad parameters for making decisions leading to the daily small victories of the individual cells so that a consistent overall image is presented (1).
- Maintaining balance relates to the unavoidable struggle within established companies between new and current business. It means ongoing renewal, but simultaneously encompasses the possibility to ensure the continuous adaptability of the company. A conscious decision within the sense of creative destruction – disrupt or be disrupted – as to when the old must make way for the new must be made here even when the old business has always been profitable. Incumbents find it especially difficult to follow this path, but there are numerous examples of companies that have successfully taken this approach.
- Compliance with the processes refers to the need in the company for regulated procedures and sequences for the systematic generation, testing, and scaling of the cells. The decisive prerequisites must be created at the structural level in accordance with the motto, “Freedom within the framework conditions.” Even though the idea of processes for innovations may seem self-contradictory, the specific and organized search for new opportunities, the formulation and testing of hypotheses, and the systematic analysis of the available information maximizes the probability of long-term success (2).
- The aim of continuous monitoring is to make visible and measurable the successes and failures during the development of the cells so that meaningful decisions about the allocation of resources can be made. The indicators required for this purpose, the so-called KPIs (key performance indicators) should be adapted appropriately to the defined process and dependently on the nature of the innovation projects. It is important for the KPIs to be defined right from the beginning and not to be oriented to traditional profitability measurements during the generation of the cells because the revenue forecasts created at the beginning of innovation projects cannot possibly have a solid basis.
- Finally, proceeding after validation means that assumptions made during the development of the cell are constantly reviewed and either confirmed or refuted on the basis of newly acquired information, e.g., from interviews, surveys, or experiments. The objective is to reduce the degree of uncertainty for the new business throughout the development of the cell because the investment of resources grows with each successive stage. If assumptions cannot be confirmed on the basis of reliable data, the cell must be dissolved to free up capacities for new cells and the lessons learned must be incorporated into the organization.
Company ReBuilding offers organizational-structural framework conditions for large companies that strengthen innovation capability, extract creative power for innovations from existing resources, and secure balance between current and new businesses. The prerequisite for accomplishing this is the bundling of resources according to customer-centric approaches and methods and radical focus on customer benefits. Established companies have a long way to go in the sustainable development of the innovation capability if they do no more than put on the startup glasses and from now on encourage their employees to paper the walls with sticky notes while wearing flip-flops and T-shirts and working in brightly colored offices.
(1) Andrew S. Grove (1996), Only the Paranoid Survive, page 146
(2) Peter Drucker (1984), Innovation and Entrepreneurship, page 34